A technical solution to implement financial regulation into secondary markets of tokenized financial assets

Resumo

In this paper, we propose a technical solution to implement financial
regulation into secondary markets of tokenized financial assets. This
solution may assist entities in transitioning their financial market
infrastructures from legacy systems to DLT platforms. We conceived the
solution for a context where one wants to keep the current financial
regulatory framework working, and a central authority has the final
word. The main design points of the solution are as follows: (i) financial
regulation is implemented as an off-chain layer; (ii) the three roles of
this market are token issuers, investors, and a single central authority;
(iii) the core component to implement such solution is a feature of DLTs
called ‘multi-signature wallet’; and (iv) using multi-signature wallets one
creates a signature scheme that makes possible the financial regulation
compliance of all transactions added to the ledger. After presenting the
solution, we explain why we decided to use an off-chain layer rather than
an on-chain layer using smart contracts. The main reason for this design
decision is that because we have a central authority, most of the benefits
of encoding financial regulation into smart contracts are drained. Thus,
the disadvantages of an on-chain layer outpace the benefits. An offchain regulation layer allows the compliance of the solution with the
current financial regulatory framework, avoids legal risks, keeps the
main benefits of using DLTs, provides agility to adapt and evolve, and
makes possible a smooth yet progressive movement to implement
DLT into the financial market infrastructure. For all these reasons, we
conclude that an off-chain regulation layer brings the optimal solution
for the given context